Deflation on the Horizon

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Deflation on the Horizon

Written by Jeff Thomas (CLICK FOR ORIGINAL)


For years, a rather pointless argument has been ongoing amongst economists - that of inflation vs. deflation.

The principle countries of the world have amassed a greater level of debt than the world has ever seen and, of course this can only end badly. But will it end in inflation or deflation? To me, this discussion is akin to arguing whether the sun will rise in the morning or set in the evening.

Those who predicted inflation and those who predicted deflation will both get to be right. This will be an “equal-opportunity disaster.”


Certainly, whenever there’s an increase in the currency in circulation, there will be inflation. Yet we don’t seem to be witnessing significant inflation. But, then, the massive quantitative easing that’s occurred hasn’t been widely circulated. It has, instead, been pumped into the banks, where most of it has stayed. Also, there has been inflation in the world in general, but less so in the US, as the US dollar is rising against most currencies. As a result of these factors, the traditional inflation before a crash has been limited.

The next major event in the row of dominoes is likely to be a crash in markets. Whilst it’s obvious to anyone who studies economics that the bond and stock markets are in a bubble of historical proportions, the majority of people (those who rely upon the media for their financial guidance) are vainly hoping that political leaders will come up with an economic aspirin of some sort that will make the debt problem go away, eliminating the possibility of market crashes.

But, now, we’re beginning to close in on the first crash. It’s within view and is finally giving pause even to the many who had maintained that it would somehow not come to pass. It’s beginning to look more real to the average person.

The bellwether has been a significant drop in the stock market. This drop does not constitute a crash, butnor is it an anomaly. It’s merely the first downward leg in the overall decline. There will be a correction to the upside, then another downward lurch, and so on. Decades from now, economics students will look back on The Greater Depression and their education will include a graph that begins in late 2015 – a jagged downward line than finally bottoms at or below 50% of the present level.

Plan on deflation following the crash.

Deflation always follows a crash. The dollar won’t go down right away. That will happen in the inflationperiod. (More about that later.)

Investors tend to muse that, if a market begins to decline, they will view the situation carefully and decide whether to sell some stocks and which ones to sell. Unfortunately, in a crash it’s very unlikely to turn out that way. In a crash, the price is heading south rapidly and there’s little time to ponder the situation. The investor is likely to find that his broker has made the decision for him.

When the equity in a brokerage account falls below the maintenance margin, the brokerage issues a margin call that forces the investor to either pony up more cash, or have his portfolio sold off to make up the loss. This may come as an unwelcome and badly-timed shock, but there’s worse to come. The greater downside is that the broker is not obliged to contact the investor prior to the sell-off. The broker may choose to sell any of the stocks he chooses in order to save himself, so, not surprisingly, he may well choose to sell those stocks that are not headed south, as it will be easier to find buyers.

Plan on a drop in the Gold Price

Many investors maintain in their portfolio a percentage of precious metals stocks “just in case.” This, they consider to be a diversification; an insurance policy. If the stock market heads south in a significant way, there’s every likelihood that this will drive up the price of precious metals. But, of course, in a crash, even a moderate one, this position will be the easiest one for the broker to sell. The investor may discover that, overnight, both his more conventional stocks and his insurance policy have diminished or disappeared.

In addition to the above, those who hold physical gold as an insurance policy against stocks may find that, if they depend upon the stocks for income, they cannot afford to pay their bills if stock earnings suddenly disappear. Something will have to go. Maybe it will be the family boat, or that beloved Harley in the garage. Maybe it will be the precious metals.

For these reasons, even the most adamant of goldbugs should be prepared for a downward spike in precious metals following a significant crash. And, if the overall crash is a series of downward thrusts, interspersed with smaller upward corrections, it shouldn’t be surprising if the gold price follows a similar path.

So, does that mean that gold and silver are not a safe haven against stormy economic periods? Not at all. It merely means that, in addition to the major clean-out of the gamblers and traders from the gold market from 2011 to 2015, there will be a final (and possibly very sudden) cleanout after a fall in the market. In my estimation, it will reflect the crash – the more severe the crash, the greater the downward spike in metals. However, the reverse will be true, in terms of its duration. The deeper the crash, the quicker those investors who still have cash will jump onto the gold truck. Therefore, the spike could be very brief and pronounced.

For those who have been prudent enough to exit the market prior to the crash and still be holding money in their hands, this would be an excellent time to buy gold. In fact, it may be the very best opportunity, because, at that point, it’s likely that gold will have reached its bottom and will be poised for an historic rise.

Plan on Inflation, in Addition to Deflation

At this time, or relatively soon thereafter, the central banks can be expected to fulfil their oft-repeated promise that they will fight deflation with money printing. In all likelihood, we will see quantitative easing like never before. The banks will print as much as they feel is necessary to counteract deflation. However, this will have a more dramatic effect on increasing the cost of commodities than to relieve the fear of purchasing assets. (The average person will readily buy food and fuel, but will not buy the boat or Harley that’s for sale in the driveway down the block.)

The increase in the cost of commodities will exacerbate the situation and the banks will respond by doing the only thing they know how to do – keep printing. Historically, when this happens, wages never keep pace with the rising prices of commodities, so the situation will worsen – deflation in asset prices with inflation in commodities.

Again, historically, this is a recipe for dramatic inflation that becomes hyperinflation. To my mind, this is the only uncertainty. Whilst the other dominoes described above are almost certain to fall, each in their turn, hyperinflation is the wild card. Hyperinflation occurs when the people of a country lose faith in the political/economic governance of the system. If it occurs, no government has ever succeeded in reversing it. It plays out until full economic collapse occurs.

If and when this happens, precious metals will most certainly retain their lustre and may provide a soft landing for those who have held their metals position during the doubtful times.

One caution: Since most of the traders and gamblers are already out of the gold market and most gold is now held by those who are long, the window of opportunity will be brief if a spike does occur. Whatever precious metals are on offer will be gobbled up quickly.


Please email with any questions about this article or precious metals HERE



Jeff is British and resides in the Caribbean. The son of an economist and historian, he learned early to be distrustful of governments as a general principle. Although he spent his career creating and developing businesses, for eight years, he penned a weekly newspaper column on the theme of limiting government.

He began his study of economics around 1990, learning initially from Sir John Templeton, then Harry Schulz and Doug Casey and later others of an Austrian persuasion. He is now a regular feature writer for Casey Research’s International Man.


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redd_green's picture

Whoa, did somebody mention naked women? 

redd_green's picture

Heh "Plan on Inflation, in Addition to Deflation" now I've heard everything.


You're going to get really fat, but lose weight doing it.


No, this isn't the most stupid article Ive ever read.   The 09/11 commission report was.  This has to  be second.

Flying Wombat's picture

US Headed for Currency Collapse - Peter Schiff

TND Videocast Spotlight: Greg Hunter's USAWatchdog

cpgone's picture

Actually PS funds been doing good latley.

Yes depression first ,with all prices down, but when , how much for how long is the question.

That said Im a recovering G/S doomer kool-aid drinker. 

Anybody know a 12 step program?

nofluer's picture

I get in line... then post a link to my thoughts on your subject.

Enjoy. :-D


We are gonna get bitch slapped by both, one at a time, alternating between nut punches and broken noses just to mix it up a bit.

Actually, it doesnt matter what label you slap on the strap on - the end result is the same - someone is gonna get fucked.  

Seer's picture

If the "buildings" are going to be toppling it's a good idea not to be in the "city." (one could also say: if the trees are falling then get out of the woods!)

bunnyswanson's picture

Agenda 21 has rural America in its grips.  Mergers/Acquisitions of farmland after 2008 when small family farmers and businesses went under.  All by design.  Cordoned off the land to "free earth" and give it back to nature will be the detour into highrise apartment buildings by warehouses and manufacturing hubs.

the grateful unemployed's picture

and as the gold price drops supply will vanish beside the point that when the etf crashes the managers of that fund will liquidate, putting gold on the market, that much is understood, but in this case who has the strong hands? the gold etf does not allow for redemption except for certain institutions who are capable of handling gold in large blocks. thats code for central banks, who will use worthless fiat to corner the world gold market. since the gold etf is liquidating they have no discretion, they have to take fiat to cover the sales.

imagine the day after, gold is $500 and there is none, because it has already moved into strong hands. if the central banks have it it is under lock and key, though of course they may choose to rehypothecate it once again, that might take months. a lot of people were waiting to buy gold, rich people with worthless fiat currency assets, who traded them in at 10 cents on the dollar. they are finally solvent and not about to sell any of that gold they bought during the crash.

so gold basically disappears, though it takes a while for the price to come back because no one wants you are offering to buy that gold, fiat currency. the price of gold then is linked to the ability of the world bankers to produce a currency which can be valued internationally. now you are basically in the barter mode, as someone who wants basic necesseties and has gold to buy it, but that is mostly the rich, i would rather be selling the food and taking gold in payment. better than food is booze and drugs. just like postwar europe. huge black markets everywhere. the rich will pay in gold, yoou need something to sell them.

in less extreme terms the government simply cancels the trades and everyone is frozen, sentiment and confidence are zero, these things never mattered. the rich like it they might actually get away with all their money. those with real liquid cash are prohibited from using it. so i take two things from this, inflation deflation we probably have both in different asset classes, and then it all reverses. you want to be ready to trade the black market, you want to buy your gold now, and you want to be the one taking gold in payment for what rich people consider necessities, a lot of them will no longer be rich, and you are there to help them.


cpgone's picture

Good points and theory.

Any other ideas besides booze and drugs?

And in your quasi Mad Max scenario , why wont the rich send their armed goons

to grab your said booze and drugs? Chaos will rule.

ejmoosa's picture

If you step back for a moment, ask yourself what was the original point of all that the Central Banks hoped to accomplish?

They wanted to generate demand.  But it's not that simple.  They pulled demand from tomorrow into today.  Then they pulled demand from next month into this month.  And when that was exhausted, they pulled demand from next year into this year.

You get the picture.

But when we got to the year where that demand was from, there was no demand there for our current year.  A vacuum exists.

That vacuum, which cannot be filled by magic, will have to be endured.  Unfortunately, they do not believe this to be the case.

There are ways to lessen that vacuum, but that will not happen either.

Reduce and eliminate rules and regulations.

Cut business taxes dramatically.

TPTB will never do either of those.

And so we wait....



Seer's picture

Very good!

I'd state, however, that they in fact know what they are doing.  It's the ONLY thing that can be done.   Think of us all running on a treadmill, if we stop the treadmill it all shuts down.  If they let growth faulter then the structures fall apart: all that which is supposed to see "returns" collapses.

An impact was inevitable.  Perpetual growth is NOT possible.  The only "control" left is to slow down the crash, to reduce impact force.  The Fed has, in essence, bought us time by buying up a bunch of shit.  As they did that there's been a lot of activity in rearranging the books to reduce the automatic tripwire events that are going to get hit.

How much difference will it have ultimately made?  Who the fuck can say.  It's like this, we could have been in the big bus as it crashed into the wall (circa Lehman); now it's like we got kicked off the bus, are destitute and the bus crash happens (w/o us in it), but we're struck by peices of the bus as it flys apart.  Or-

“Mankind is facing a crossroad - one road leads to despair and utter hopelessness and the other to total extinction - I sincerely hope you graduates choose the right road”-- Woody Allen


hxc's picture

and people wonder why we are anarchists. The holy gubmint can only get money 3 ways:


1) borrow it (stupid)

2) tax it away (theft)

3) print it (stupid AND theft)


Welcome to hell. Buy yourself some fancy precious metals, bitcoin, and stuff your mattress full of FRN's in case Yellen has another stroke.

jenniewadeguy's picture

Brits are never first correct about anything.  Never.

jjsilver's picture

Deflation: A contraction of money supply or available credit.

Who has the power to cause a contraction of the money supply or available credit?

redd_green's picture

Fritz Himmelbacher.  He can do it blindfolded.  

McCormick No. 9's picture

If you default on a loan, that money disappears from the economy in the same manner that it appeared- instantaneously and completely. Once the defaltionary dynamic starts, a lack of money caused by the initial defaults spirals into more defaults, further lessening the money supply and driving even more defaults.

Of course, most of us will default in a reactionary way. A bank will go under, defaulting on its debt. That will cause the company we work for to go under, defaulting on its debt. Without a job, we will default on our debt, and so forth.


jjsilver's picture

You're on the right track. What money? What did they loan you and where did it come from? Why are people defaulting on loans?

What about the ability to borrow, after you have defined money and what your have borrowed.

What about not making it possible to borrow that something that first you have to define and then determine where that something came from.

Should anybody have an exclusive right to charge an interest rate to someone when there has been no consideration?

Is there enough of the alleged something in existence to pay back all the undefined thing borrowed from an unknown source that is in existence?


Seer's picture

It depends on what you would call an "asset."

I'm pretty sure that what most believe are assets today are not going to be viewed as assets in the future.

Peg something to the true fundamentals of Food, Shelter and Water and it's likely going to be continue to be an asset in the future.  Energy will likely always be an assets, though conventional energy (not high-tech, high-maintenance stuff).


TrumpXVI's picture

There are too many moving parts to this analysis.  I doubt that things will unfold this way.

Be prepared for deflation; hold cash.

Be prepared for inflation, hold gold.

Be prepared for TPTB & TTBTFB to continue to distort the markets, pass legislation and disseminate propaganda designed to cheat you out of what little wealth you own.

That is all you really need to know.

Truth Eater's picture

Debt means control by a creditor.  There will be no helicopter money to wipe out debt.  Why would controllers give up their control?  As the middle class fades into oblivion- that is, the ranks of the poor, there are no new borrowers to further empower the creditors. All these debt currencies must be borrowed into existence.  Since the average person cannot afford any more debt, the government has been conspired to amass debt and shackle it to the people.


The global economy has been set up to separate wealth generation from those who would buy the goods of production.  It destroyed local markets and local economies, only rewarding temporarily the large players.  To sell goods, you need buyers with money.  China has discovered how unstable an economy is that can only sell. 

Seer's picture

That "control" is about controlling consumerism.  There's much more to life than that.  "They" have the assets, and "they" have the control of  the means of "force."

"The global economy has been set up to separate wealth generation from those who would buy the goods of production.  It destroyed local markets and local economies, only rewarding temporarily the large players.  To sell goods, you need buyers with money.  China has discovered how unstable an economy is that can only sell."

Given that a lot of "wealth" extraction had to occur in the midst of populations of unrest (the bulk of wealth comes from natural resources- can you say "petro-dollar?") there is a lot of risk.  The big players get rewarded for that risk: it's compensation for knowing that you're goig to go to hell (in whatever way you wish to view it).  The overwhelming percentage of wealth was created largely due to cheap energy.  That cheap energy, which might appear "cheap" today, is coming to a close: the true costs involve the difficult equation of middle east adventurisms wherein large sums of pooled wealth (US taxpayer money/debt) is necessary slap down the risk (and some civilians) and the resultant energy "price."

Everything has been based on a Ponzi scheme.  Point at the outer layer of the crime built upon the core crime is pretty pointless.  Scape off the ugly outer layer(s) and the game won't change (because the core never does).

crashguru's picture

However, this will have a more dramatic effect on increasing the cost of commodities than to relieve the fear of purchasing assets.


QE has now no effect on commodities, why then? Anything short of helicopter money (i.e. direct purchase of Gob debt) wont stop deflation imho.

Doppelganger71's picture

Helicopter money in 3..2..1....

Seer's picture

Careful, the helicopter might hit us before it manages to drop its payload!

Slowdrip's picture

Trick or Treat.....

Getting Old Sucks's picture

Not being an economist, my take on what's happening is:

Banks illiquid so FED prints for banks, banks leave on deposit with FED for capital requirements.

Corporations downsize to equal less demand.

FED buys bonds for GOV to sustain unemployed, and keep some industries alive.

Corporations use cheap loans and profits to buy back stock as there's no reason to expand.

GOV needs insured deposits moved to risk investments so market must remain high.

Those with money don't need or want debt and those with no money can't get loans.

Those with money have run out of things to buy while those without can't buy or run out of credit.

PM's have to stay low to keep Fiat alive.

Everything goes nowhere till it all goes away.

I'd like to see someone break these, and other factors all down into an economic study of the whole picture rather than just parts here and there.

Seer's picture

When you look at it it sure looks like the way that it's currently playing out.  Many will blast me for saying this, but I think that, when viewed as you lay it out, a pretty good job has been done of piloting this flaming pile of dogshit down toward something that resembles a landing (more so than would otherwise have happened).

Bernanke et al were there at the podium to distract the barking dogs from noticing that the real sleight of hand that was going on was to allow a big door for those who were not watching the Big Show to escape.  Just because you notice rats jumping from the ship it doesn't mean that you're a rat too if you jump from the sinking ship.  Take advantage of the cue.  They are NOT going to tell you the ship is sinking: if people aren't smart enough to figure it out they're just not smart enough to swim.

Don't make the mistake of believing that black swans can't land on PMs.  Govt and govt forces might be waiting outside that auditorium door looking to pick off anyone that doesn't have the correct "thermal imaging" (not allowed to have PMs).

pndr4495's picture

Sounds to me that you didn't have to pay anyone tuition to let the world know that you are intelligent, and smarter than the average economist too.

lunaticfringe's picture

I think you nailed it more or less.

I am in the stagflation camp. In the petri dish is Japan. They did the same fucking thing we did, have the same atrocious debt levels (sans our accounting gimmickry) and thus we are dying the same slow death.

One day they will be forced to try and print themselves out of debt. That's when this fucker will get really interesting. I just wish I was gonna be here for neck stretching time.

Son of Loki's picture

Good summary but I agree with the stagflation or biflation situation since I see certain costs -- health insurance, meds, prop taxes, other insurances, etc -- are still rising pretty fast.  Oil and gold have corrected quite a bit but stawks and houses are still seriously overpriced and will eventually correct/revert to the mean also.


Otherwise I agree with the above. It's quite amazing to see people bidding $120k to $180k above the listing price for a crappy $1,000,000 place in SF while many others can't even afford a 3% down payment on a $138k house in places like Ohio, Indiana, Oklahoma or Kentucky.